Shareholder Incentives for Utility-Based Energy Efficiency Programs in California
41 Pages Posted: 22 Dec 2008 Last revised: 8 Dec 2014
Date Written: December 12, 2008
Abstract
Energy efficiency is increasingly being recognized as a resource warranting aggressive public investment. The State of California has committed an unprecedented sum of $2.2 billion in ratepayer funds to utility-based energy efficiency programs from 2006 through 2008; the State finalized in 2007 the determination of the shared-savings incentive mechanism for the 2006-2008 programs and beyond. This study seeks to examine whether the adopted incentive mechanism would ensure an efficient delivery of the programs, and what reforms, if any, could be proposed to meet this end. I develop a game theory model for the implementation of the programs, in which a regulator adopts an energy savings target and a shared-savings incentive mechanism before a utility firm proposes program funding, gets the proposal authorized, and begins to manage the programs. The study reveals that each utility firm requires a certain minimum level of incentive rate, in order for the mechanism to encourage the firm to achieve the adopted energy savings target, eventually bringing non-negative bill savings to its customers. It also reveals that a higher-than-minimum incentive rate can achieve not only a greater net social benefit but also greater bill savings for customers. Model-based analysis of California energy efficiency programs suggests that a higher-than-adopted incentive rate is warranted and that social efficiency would be improved by customizing incentive mechanisms for individual utilities and updating them on a regular basis.
Keywords: Energy Efficiency, Utility Regulation, Shareholder Incentives, Shared Savings Incentive Mechanism, Ratepayer Funds
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Energy Efficiency Economics and Policy
By Kenneth Gillingham, Richard G. Newell, ...
-
Energy Efficiency Economics and Policy
By Kenneth Gillingham, Richard G. Newell, ...
-
The Rebound Effect and Energy Efficiency Policy
By Kenneth Gillingham, David Rapson, ...
-
Are Building Codes Effective at Saving Energy? Evidence from Residential Billing Data in Florida
By Grant Jacobsen and Matthew J. Kotchen
-
Is There an Energy Efficiency Gap?
By Hunt Allcott and Michael Greenstone
-
Is There an Energy Efficiency Gap?
By Hunt Allcott, Hunt Allcott, ...
-
Cost-Effectiveness of Electricity Energy Efficiency Programs
By Toshi H. Arimura, Shanjun Li, ...
-
Cost-Effectiveness of Electricity Energy Efficiency Programs
By Toshi H. Arimura, Shanjun Li, ...
-
By Dora L. Costa and Matthew E. Kahn